Models of Corporate Governance_2007

8/8/2019 Models of Corporate Governance_2007

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MODELS OF CORPORATEGOVERNANCE

Corporate Governance Seminar

12th november 2007

Chiara Farolfi, Emanuele Ciani


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Introduction

Main problems of abstracting a model of CG

Companies are multidimentional: different modelcan apply to one national experience

Convergence and imitation

Efficiency CONVERGENCE

HistoryPath dependence

HETEROGENEITY

Does a best model exist?


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Presentation outline

1) Models of Corporate Governancei. Insider / Outsider

ii. Civil law / Common law

iii. Relationship based / Arms length

2) International comparison

i. Germany

ii. United States

iii. Italy

iv. Japan

3) An alternative approach : Cooperatives in Italy


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Insider / Outsider (1):

ownership and control(Franks and Mayer, 2001; Becht and Mayer, 2001)INSIDER OUTSIDER

Equity market few listed company wide market

Share ownership concentrated Dispersed

Voting powerhigh concentration (pyramids, non-

voting shares, multiple voting)

low concentration, separationbetween ownership and

control

Main shareholderfamilies, banks, other companies,

governementinstitutional investors,

individual shareholders

Corporate control

market low level of takeover

high activity in corporate

control marketInformation private public

Composition ofBoD

large number of directorsappointed by the main blockholder

presence of outside directors

Control on

Managementhigh low


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Insider / Outsider (2):efficiency trade-off

Private control bias

Managementor market

control bias

Highblockholder

power

Low

blockholderpower

Lowownership

concentration

Highownership

concentration

from: Becht and Mayer, 2001


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Common Law / Civil Law(Morck and Steier 2005, La Porta et. Al1998)

Common law systems: aim of protecting the weak from the strong

better environment for self-regulation

Common law stronger protection of shareholders

Civil law systems: aim of enforcing the edict of the State.

Civil law low investors protection weak publicequity markets;

high concentration ofshare ownership

Agency problem shifted:shareholders/ blockholder

private benefit

problem


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Relationship / Arm's length (1):relationship between the financer and the firm

(Rajan and Zingales, 1998)

Reponses

RELATIONSHIP BASED ARMS LENGHT

Financierpower

Ensure a return to the financier bygranting her some form of power

over the firm being financed

The financier is protected by explicitcontracts: contracts and associated prices

determine the transactions that areundertaken

Legalenforcement

Self-enforcing and self-governing:reputation

Prompt and unbiased enforcement ofcontracts by courts

Transparency Needs opacityProduction of credible and diffused

information

InnovationTends to support incumbents; fear

of outsiders and technologicalrevolution

Easier access to finance for new comers

Management

Common education (technical oradministrative), or non

professional

Long term managers

Rarely foreign-born

Business/financial educationHigh turnover of management

Presence of foreign-born or internationalexperienced individuals

BoD High presence of insidersRepresentation of stakeholders

Active control of managementPresence of outsiders


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Relationship / Arm's length (2)

we can widen these models adding some correlated

characteristics (abstracting from Italian, German andJapanese examples, Aguilera and Yip, 2005)

Reponses of countries to the Great Depression:

Europe and Japan period of repression of markets and

massive intervention of government

in the allocation of credit.

United States New Deal legislation laid down the

foundations for a market centred system

Glass Steagall Act (1933)


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1) Models of Corporate Governance

i. Insider / Outsider


iii. Relationship based / Arms length2) International comparison

i. Germany

ii. United States

iii. Italy

iv. Japan

3) An alternative approach : Cooperatives in Italy


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Germany(Becht and Bohmer 2003, Franks and Mayer 2001)

Main businnessform

Public or private companies limited by shares

Predominantownershipstructure

Concentrated ownership: families, other non-financial companies,banksLarge voting block, absence of other voting block

Legal system Civil law

Board structureDual board system; Employees representatives in the supervisory

boardSome directors comes from other companies (i.e. Pich - Porsche)

Equity market Increasing market capitalisation and corporate debt issues

Take-overLow activity (increasing - i.e. recent overturn ofVolkswagen law)Little regulation of anti-takeover until 1998 Control and Transparency

Law (KonTraG)

Management Common technical background; few foreign born individuals

StakeholdersCo-determination (i.e. Volkswagen wage freeze in 2004)

Banks representation as a result of proxy votes


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Improving take over activity (Cioffi 2002) Control and Transparency Law 1998

Fiscal reform 2000 (Steuerreform) abolished capital gain

taxes on the liquidation of cross-shareholdings.

Volkswagen law overturned on October, the 23rdbyEuropean Court of Justice, (Financial Times, 23/10/2007)

Stakeholder representation:

does it lead to empasse? Volkswagen case;

roots in communitarian German culture (Monks andMinow 2001).

Germany (2)


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USA (1)(Monks and Minow 2001, Mallin 2007)

Main businnessform Public companies (stock corporation)

Predominantownershipstructure

Institutional investors, financial institutionsDispersed ownership and vote rights: absence of bigblockholders

Legal system Common law

Board structure Unitary boardHigh presence of outsiders; however: interlocks

Equity market Well-developed, high rate of market capitalisation to GDP

Take-over High activityDefence from management: poison pills

Management High level of independence; financial background; moreforeign born.

Agency problem: often CEO/Chairman are the sameperson; CEOs higly Influence directors nomination

Stakeholders Their protection is mainly guaranteed through contractsand regulation


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Answer to the Great Depression

Glass-Steagall act 1933; Public Utility Company Holding

Companies Act 1935

development of equity market. Agency problem:

Relationship based model at the level of BoD-Management;

Voting with feet?

My nominating committee is very independent.

Sometimes they turn down the names I send them (Monks

and Minow, pg 212)

USA (2)


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Italy (1)(Mallin, Bianchi, Bianco, Enriques)

Main business form Limited liability companies, partnership

Predominant ownershipstructure

Non financial / holding companies,families

Predominant voting structure Voting blocks / shareholders agreement


Board structure Unitary + Board of auditors

Equity marketIncreasing capitalization, derivativesmarket and corporate debt issues

Take - overNot common, but increasing as aconsequence of privatization

Management Long-term managers, rarely foreign born

Stakeholders Trade Unions


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Italy (2)(Mallin 2006, Melis, Bianchi, Bianco, Enriques 2001)

Response to the Great Depression nationalist solution

No predominant role of financial institutions

Draghi Law (1998) and Preda Code (1998)

enhancement of minority protection and transparency

Company Act (2004)

A sort of State family capitalism

Pyramidal structure

ownership

very limited degree of separation

between ownership and control

Italian structure allows Italian listed companies

to choose between a two tier board structure

and the traditional


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Japan (1)(Suto and Hashimoto 2006)

Main business form Public limited company

Predominant ownershipstructure

Keiretsu / Predominant role of financialinstitutions


Board structureDual

Large presence of insider

Equity market Immature capital market

Take - over Strong takeover barriers

ManagementInternalism: common educationalbackground/ on-the-job training, co-ordination between manager andemployees

Stakeholders Society as whole


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Japan (2)

Relationship based system

Key role of banks

Keiretsu

Revision of Commercial Law in 2001 and in 2002

Commercial Code Revision on Board (2003)

two corporate governance structures:corporate auditors system and a

committees system

Case of study: Toyota vs. Sony


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1) Models of Corporate Governancei. Insider / Outsider


iii. Relationship based / Arms length

2) International comparisoni. Germany

ii. United States

iii. Italy

iv. Japan

3) An alternative approach :Cooperatives in Italy


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A different approach:

a cooperative model in Italy (1)

Historical origins: (Zamagni 2006)

non neutral origin, three different ideals: liberal-

Mazziniani, socialists, catholic;

wide entrenchment through Italy;

expansion during last years.

% of total companies %of total employees

1971 0,48 1,87

1981 0,67 2,741991 1,08 3,84

001 1,22 5,02

Number of cooperatives and cooperatives employee as apercentage of total employee (exluding public institutions)

source: ISTAT,Censuses of industry and the service sector, various years


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A cooperative model in Italy (2)

Cooperative Corporate Law:

mutual interest as cooperative aim;

one head one vote;

democracy and partecipation;

indivisible compulsory fund.

Problems:

management control (i.e. recent large cooperative

bankruptcy in Argenta); how to define and follow cooperative aim in a

competitive environment?


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Conclusions

1) Different systems around the world are persistent and are

developing in different ways

wide range of solutions for a wide range of problems

2) Different models can have similar problems

importance of global discussion of these issues


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Thank you for

your attention !!!


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References Aguilera Ruth, Yip George. 2005. Global constraints faces local constraints. Financial Times, 27 may 2005.

Becht M. and Mayer C. 2001. Introduction in Barca and Becht, 2001.

Barca Fabrizio, Becht Marco. 2001. The Control ofCorporate Europe, Oxford University Press UP

Cioffi, John W. 2002. Restructuring Germany Inc.: The Politics ofCompany andTakeover Law Reform in

Germany and the European Union (April 15, 2002). Institute of European Studies. Political Economy of

International Finance. Working Paper PEIF-1

Franks Julian R, Mayer Colin. 2001. Ownership and control of german corporations, CEPR Discussion Paper

Series, No. 2898, July 2001

Mallin Christine A. 2007. Corporate Governance, Second Edition, Oxford University Press, New York.

Mallin Christine A. 2006. InternationalCorporate Governance: A Case Study Approach, Edward Elgar

Publishing. (Italian Case, cap. 3, Japanese Case, cap. 10)

Monks R.A.G., Minow N. 2001. Corporate Governance, 2nd edition. Blackwell Publishing.

Morck Randall K. and Steier Lloyd. 2005. The global history of corporate governance an introduction,

NBER Working Paper No. 11062, January 2005

Rajan, Raghuram G. Zingales, Luigi. 2003. Banks and Markets: The ChangingCharacter of EuropeanFinance (joint with R. Rajan), in European Central Bank 2nd Annual Conference.

Suto, Megumi and Hashimoto, Motomi. 2006. Will the Japanese corporate governance system survive?

Challenges ofToyota and Sony, in Mallin, 2006.

Zamagni, Vera. 2006. Italys cooperatives from marginality to success. XIV International Economic History

Congress. Helsinki Finland. 21-25 August 2006.

Models of Corporate Governance_2007

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